ESG InvestingNov 16 2020

Has Covid changed ESG investing?

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Has Covid changed ESG investing?

Terence Moll argued that technology, regulation and client demand will continue to drive investors’ growing appetite for environmental, social, and governance funds until fossil fuel stocks eventually die out.

Speaking at FTAdviser’s webinar ‘Has Covid-19 changed ESG investing for good?’ on October 29, the head of investment strategy at 7iM said: “ESG indices are biased towards winning companies of the future and have far less exposure to the losers of the past.

“Clean technology – the kind that is associated with ESG companies – has raced ahead and productivity is up and prices have fallen.

“So now it is cheaper to produce using clean tech rather than using the old, dirty stuff. This is ultimately the reason why fossil fuel stocks are doomed. Clean energy from solar and wind are going to eat them for breakfast, probably in the next few years, and there is a simple reason for this.”

Mr Moll explained: “Fossil fuels are a resource where the more you mine of a resource, the more costs rise. Solar power is different – the more solar you install, then the more prices fall. Look what happened to oil stock in 2020. There was a huge crash in oil demand and it will take a while for the demand for oil to recover, but I don’t think it’ll ever get back to 2019 levels.

“We have seen peak oil. Let me repeat, I firmly believe that we have seen peak oil. Clean energy will continue to take over instead. This is why I think ESG stocks are going to outperform in the long run. Dirty, nasty, badly-run companies are going to get crushed by their clean, well-managed, tech-savvy competitors. Taking a 50-year view, I am not betting on Chevron and Shell.”

Future of energy

His comments come as electricity generated from renewable resources has steadily soared over the past few years. In fact, 2019 was a milestone year for Britain, as it generated more of its electricity from zero carbon fuels than from fossil fuels.

Clean technology – the kind that is associated with ESG companies – has raced ahead and productivity is up and prices have fallen.--Terence Moll

However, Mr Moll said he believes the current coronavirus pandemic is the defining factor that has rocketed the demand for ESG funds this year.

He said: “When we look back from the year 2030, I suspect we will realise that this year was the year that ESG really took off because of Covid-19 and its aftereffects.

“Increasingly, investors not only want their money to make more money, but also to make the world a better place, or at the very least not to make it worse. The pandemic has reminded us that human life is short and fragile. It makes us think about our responsibilities to the future – the kind of planet we will be leaving to our grandchildren and that points to ESG investing. In short, Covid has given ESG a huge boost.”

This view was echoed by Gavin Haynes, investment consultant for Fairview Investing, who said: “2020 is definitely going to be a defining year for ESG. It was a trend that was moving quickly but Covid has acted as a catalyst to refine how investors, regulators and consumers react to ESG investing. For the first time in a long time, you’ve seen a real shakeout in the market because of the sustainable areas ESG has focused on and it’s proved to be very defensive in a difficult market climate.”

Greenwashing

However, Mr Haynes argued that a major stumbling block for ESG investing will be how it tackles the unsavoury practice of greenwashing.

When we look back from the year 2030, I suspect we will realise that this year was the year that ESG really took off because of Covid-19 and its aftereffects.--Terence Moll

This is a when a company spends more time and money on marketing themselves as environmentally friendly, rather than actually minimising their environmental impact. It is a deceitful advertising gimmick intended to mislead consumers who prefer to buy goods and services from environmentally conscious brands.

He said: “The industry has really got to work to make it easier to avoid those who are just paying lip service to it – ‘greenwashing’ for want of a better word. There needs to be some clearly defined parameters put in place. The regulator needs to be involved to allow you to scrutinise funds that are greenwashing their proposition.”

The webinar also highlighted how IFAs can tap into the success of sustainable investing, by recommending ESG funds.

Minesh Patel, chartered financial planner and director for EA Financial Solutions, said: “The outperformance of ESG funds will escalate the demand.

“At present, I am recommending ethical and sustainable funds to 90 per cent of consumers and I get very little push back from clients not wanting to invest in sustainable funds.  

“If we as advisers embrace the area, then that will further accelerate demand. Previously, the advice community has viewed ethical and sustainable funds with some suspicion due to underperformance, which has actually really never been the case. But I think the movements of this year will only accelerate that trend further.”

More clarity needed

However, he argued that if ESG investing is to be successful in the long-term, then advisers need clearer definitions of ESG funds, so that they can be confident in recommending such investments to their clients.

The industry has really got to work to make it easier to avoid those who are just paying lip service to it – ‘greenwashing’ for want of a better word.--Gavin Haynes

Mr Patel said: “I’d like the area to be more clearly defined because it is one of the things that goes through my mind every time I am selecting funds. ‘How does this fund score on sustainability? How does this score on ESG?’ I find it a very difficult area to navigate.

“I did read that one specialist adviser in sustainable investing said he looks underneath the bonnet of each company and does detailed searches on each company the fund invests in. I must confess that I don’t go that far, but I would like more assistance in categorising the different definitions of ESG, sustainable, and ethical [funds]. It is an area that is not so easy to navigate and I have to spend some time on it.”

He added: “One of the criteria I do use is how long the manager has been doing it. I also read more widely on their shareholder activism. So, I am looking beyond the definition to see what more the fund managers have done for the promotion of sustainability and the achievement of equality. 

“But I would like more assistance. It would be nice to have a sustainability fund sector and an ESG sector, or an ethical sector – just something that is more clearly defined by the regulator. It needs to come because it produces confusion and confusion then produces lower take up.”

The webinar will remain available online for a month. Visit: https://tinyurl.com/y4yf8cmq

Aamina Zafar is a freelance journalist